Saturday, August 28, 2010

Why Don't Universities Sell Admissions?

Or do they?

It would be a mistake for schools, especially elite schools, to allocate places entirely on the basis of price, for at least three reasons.

1. Part of what schools are selling is a credential, and part of that credential comes from having been admitted. An employer prefers, ceteris paribus, employees able enough to have gotten into Harvard or Chicago. He has no reason to prefer ones rich enough to have bought a place at one of those schools.

2. The value to students of attending a school depends in part on the school's reputation, which depends in part on the quality of students admitted in the past. By basing admissions on measures of applicant quality the school may be able to raise average student quality, thus raise the performance of its graduates, thus raise the value of the school to future applicants.

3. Students are both customers and inputs. Smart students prefer an environment with other smart students, and probably learn better in such an environment. Put differently, a smart student provides positive externalities to fellow students and thus, indirectly, to the school, a dumb student provides negative externalities.

All of these explain why schools give some weight to measures of student quality in deciding whom to admit. But none of them explain why they give no weight at all to willingness to pay. A student is worth more to the school the more able he is, but not infinitely more. Even if student quality is the only thing schools care about, additional money could be used to offer more generous scholarships to able students who would otherwise go elsewhere, raising average quality. So one would expect schools to be willing to trade off, at some rate, money against SAT scores, agreeing to admit somewhat less qualified applicants at somewhat higher prices.

So far as I can tell, they do not do so. The reason might be internal ideology—elite schools for the most part are rich nonprofits, in a position to sacrifice financial benefits in order to act in ways that those running them approve of. It might be other people's ideology—schools may fear that the policy I have suggested would be seen as a corrupt favoring of the undeserving rich over the deserving poor. While everyone recognizes that wealth confers advantages on those who have it, many people find that fact objectionable, at least if the advantages are in things they think important, such as health care or education.

Both of those are, I think, plausible explanations, but not very interesting ones. Can anyone suggest a better alternative?

While discussing admission policies, it is worth also thinking about another puzzle: legacy admissions. While schools do not preferentially admit those who are willing to pay more—many claim, I suspect truthfully, that they do not even preferentially admit those able to pay full tuition over those who can only come if given large amounts of financial aid—many do preferentially admit the children of their alumni.

One possible explanation connects to the first part of this post. Legacy admissions can be seen as a covert and imperfect way of doing what I have just argued that schools do not do. Applicants are instructed to list on their applications any alumni among their close relatives. Alumni offices keep track of alumni donations; that information can be provided to admissions officers.

Are there other reasons for legacy admissions? One possibility is that the school thinks of itself as having a particular culture, being intended for a particular sort of people. Its alumni, having been not only selected to fit into that culture but instructed for four years in it, are particularly likely to be that sort of people, making their children more likely to fit in.

Another possibility is tribalism. Humans tend to divide the social world into ingroup and outgroup, us and them. One basis for such a division is what school one went to, a fact dramatically demonstrated at college football games. The people running a school and its almuni are part of the same ingroup, admission can be seen as a benefit given to those admitted, and people naturally prefer to allocate benefits to us instead of to them. They also prefer to include in the ingroup those most likely to be loyal to it. If Harvard admits the son of a Yale graduate, can he be trusted to cheer for the right team?

The reason I've always heard cited for legacy admissions is that those students are more likely to attend once accepted. Higher yield rates increase some rankings, as well as reducing risk to the school.

The things you mention are a bit puzzling. Perhaps because academics tend not to be very keen, or very good, at profit maximization? (Just a tentative idea, it may not hold water.)

I also puzzle lightly over the American tendency to treat 'school' and 'university' as synonyms. In my experience in Britain, I went to school between the ages of 3 and 17, then I went to university. Two countries separated by a common language...

But universities DO price discriminate, and from what I can see, very well.

Step 1--Jack up tuition to the stratosphere (it doesn't take $50,000 to pay for adjunct faculty to teach 50-100 people in a course; at 4 courses per student per semester, that works out to $300K-600K per course incoming tuition).

Step 2--Be very 'generous', but selective on financial aid. I have heard (but don't have any documentation) that in many schools 80%+ of all students get financial aid. And with the proliferation of various scholarships, universities get a two-fer--more donations and increased ability to price discriminate.

Step 3--Set a floor for 'quality', but admit more than you expect to matriculate. People who don't get significant aid now have to decide whether it is worth it to pay more. And aid offers are not uniform. I have several friends with college age kids and they all say the offers are all over the map.

Result: Students you want pay less; students you don't want as much pay more to attend. Better for PR than selling admissions, but not much different in my view.

Anonymous is correct with regard to merit based scholarships, since they result in charging a higher price to the less well qualified students.

But many schools at least claim that all or most of their scholarship money is need based rather than merit based. If so, they are charging a higher price to the students who can pay it. But they are not charging a higher price to students who they would be unwilling to admit at the ordinary price.

That is price discrimination but it isn't the sale of admissions slots.

look at executive MBA education, MPA's, JD's and various professional and semi-professional master's.

Need-based aid is rare in PhD track either. It's mostly merit based (fellowship), uniform unconditional (fellowship) or wages (TA/RA). Unfunded PhD admit is basically a soft reject but rich-er people may choose to take it anyway.

Undergrad tuition is a small fraction of income for universities. They also get grant overhead for professor's grantsmanship awards, private donations, public investments in labs etc.

But a lot of layman reputation comes from undergrad quality-selectivity (while only small % of revenue).

If we accept the argument that universities do not sell places but instead allocate admissions purely based on academic merit then this provides a strong argument for university education being a signal.

After all what would a degree signal if it were simply sold to those prepared to pay the highest monetary cost? And why would universities sell admission at any price below the market cleaning price if the value of an university education was simply an increase in the student's future productivity, independent of the prior productivity of the prospect students?

University endowments and alumni giving may provide the missing piece to the puzzle. Instead of charging the greatest possible price at the time of schooling, universities cultivate a sense of obligation to "give back" among their successful graduates. This is not binding of course, but alumni have an interest in maintaining their school's reputation. Further, non-profit status and "low" tuition enhance the signaling value of donations. Legacy preferences make sense because such families are more likely to be/become big donors.

Just as we sometimes assume budget maximization as the objective of government agencies, I think our first-approximation model for universities should be endowment maximization.

I like how you have two "plausible" explanations, but don't like them because they're not "interesting". :-)

One explanation I've heard for legacy admissions is that the school's goal is to accept good students. There is no way to be certain whether a given student will be a good student, but being a child of a good student is probably a strong signal (maybe not as strong as grades or test scores, but still useful). Especially since people with different learning styles do well a different schools; relatives probably have similar learning styles.

Do they look at the parent's grades when considering a legacy student? Even if they don't, the fact that the parent graduated would be a good signal.

Also, at top schools, alumni are much more likely than the general population to be rich, so favoring legacy students might be a sneaky way to favor kids who won't need financial aid. (This is true not only because going to a top school increases one's earning power, and not only because of a correlation between earning and intelligence, but also because it used to be much harder for poor students to attend top schools. Are schools starting to give less weight to legacy status than they used to, now that incoming students are more likely to have had access to financial aid?)

'Applying for an EB-5 visa is based upon an applicant's intention to begin a commercial enterprise which will be of benefit to the United States economy and will create employment opportunities for at least 10 people in the permanent resident or US citizen categories. In America, visas of this kind are based around investment, and the minimum amount required is USD $1,000,000, although in cases where an investment is in a "targeted employment area", this figure may be reduced by half.'

Why doesn't parents' wealth, status, income etc not a major question? Some need-based forms may ask it but I think if someone didn't ask for aid, they wouldn't be able to signal parents have large assets or are successful doctors/lawyers.

Even if you don't want to pay extra tuition, that would help to predict future donations. Relying on legacy is 40year lag, old-money. Nouve-rich or immigrants with millions don't show up like that. And it's rare to expect a building donation from some parent before getting admission if they aren't sure WHICH university their children will matriculate at. Besides, 5M+ donations are rare just like the point about US citizenships. The long tail of professionals with recurring 100k donations each will be more profitable.

It is widely believed that universities do sell admissions, but they hide it both for the reasons you mention and for tax evasion.

If your observations make you an outlier, shouldn't you be sharing those observations?

As other commenters say, it is very easy to imagine, but hard to measure, that legacy admissions take into account accumulated donations. Some accounts of Harvard's "Z-list" claim that it is an opportunity for the parents to top up their donations.

There is strong evidence that alumni of selective universities believe that donations will increase the likelihood of their children being accepted to the university. Empirically, the presence of children increases an alumnus's giving; giving drops off after the admissions decision; and the decline is far greater when the child is rejected. See Jonathan Meer & Harvey S. Rosen, "Altruism and the Child Cycle of Alumni Donations," 1 American Economic Journal: Economic Policy 258 (2009).

The alumni of selective universities tend to be savvy, and it is likely that they communicate with one another. It seems doubtful that this perception would last if it did not have a basis in reality.

This article also mentions a recent interview by the Wall Street Journal of the president of Princeton University. When asked, "Why does Princeton give admissions preference to alumni children . . .?," her response was, "We are deeply dependent on the generosity of our alumni each and every year . . . They are extremely important to the financial well-being of this university." John Hechinger, "The Tiger Roars," Wall Street Journal, July 17, 2006. This linking of the acceptance of alumni children to the financial support the alumni give to the university seems telling.

Finally, universities could at least sell admission to persons on the waiting list without sacrificing quality. The people on the waiting list (as well as the marginal students who are admitted) are likely to have virtually identical qualifications.